Suppose that Big & Tall and Short & Sweet are two clothing manufacturers in a duopoly and that each chooses independently whether to advertise or not advertise. If neither advertises, each gets $100 million in profit; if both advertise, their profits are $50 million each; and if one advertises, while the other does not, the advertiser gets $150 million in profit, and the other gets $20 million in profit. If the firms collude to maximize joint profits:
A)both may or may not advertise.
B)one will advertise, and the other will not.
C)both will advertise.
D)neither will advertise.

Question

Quizplus · Accepted Answer

If the firms collude, they will both choose not to advertise in order to maximize their joint profits. If one firm were to advertise, they would make $150 million in profits while the other would only make $20 million, leading to a total profit of $170 million. However, if neither firm advertises, they will each make $100 million in profit for a total joint profit of $200 million, which is greater than the profit from any other outcome. Therefore, the best choice for the firms is to both not advertise.

Suppose That Big & Tall and Short & Sweet Are